C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002729

SIPDIS

STATE FOR E, EEB AND EAP/J
NSC FOR JIM LOI
USTR FOR DAUSTR BEEMAN
TREASURY FOR IA/DOHNER, POGGI, AND WINSHIP

E.O. 12958: DECL: 09/27/2018
TAGS: ECON EFIN PGOV JA
SUBJECT: ASO'S ECONOMIC POLICY: STIMULATE THE ECONOMY TO
WIN THE ELECTION

REF: TOKYO 2639

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Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 b/d.


1. (C) SUMMARY: Prime Minister Taro Aso's campaign pledges
and initial policy speech have focused on an economic
stimulus policy that appeals to Japanese voters concerned
about their pocketbooks and the direction of Japan's economy.
Aso's short-term electoral focus is not to launch a return
to the pork-barrel politics of the 1990s. Rather, his
remarks show thinking that the ruling Liberal Democratic
Party (LDP) will have a hard time fighting a Lower House
election on a platform of fiscal austerity and pursing needed
-- but painful -- structural reforms. END SUMMARY.

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SHORT-TERM ECONOMIC STIMULUS: AN ELECTION NECESSITY
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2. (C) Prime Minister Aso, who faces the question of whether
and when to dissolve the diet and call for early Lower House
elections, is building an economic campaign program built
around a central theme: "stimulating the stagnating Japanese
economy." During his first address as Prime Minister on
September 29, Aso pushed his three-stage approach: stimulate
the economy in the short-term; repair the country's fiscal
balance in the medium-term; and increase Japan's potential
economic growth rate through structural reform in the
long-term. Despite having experienced its longest continuous
period of economic growth, albeit uneven and with little real
wage growth, in post-war history, Japan's economy now is
weakening (at an annualized real rate of negative 3 percent
GDP growth in the second quarter of 2008) and slowing global
growth is restricting Japan's ability to export its way out
of the downturn. As a result, Aso is putting a priority on
short-term economic stimulus.


3. (C) He has also put aside, at least for now, the
structural reform banner that former PM Koizumi once held

high. The need to reform the pension and healthcare systems,
to introduce greater competition into the economy, and to
raise productivity have not gone away, but the dominant
perception within the LDP is that the public is tired of
structural reform and needs to be reassured. As one member
of the Council for the Promotion of Regulatory Reform
summarized developments over the past two years to Emboffs,
former PM Abe "was willing, but not competent, to work on
reform, PM Fukuda was not interested, and PM Aso might even
turn the clock backwards." Aso also seems ready to suspend
or delay the present fiscal consolidation target of achieving
a government primary surplus by FY2011, as he has implied on
a number of occasions. Aso's fiscal policy will widen the
deficit, reversing the current trend of narrowing the deficit
since FY2004. This reversal, without monetary adjustments
from the Bank of Japan, will likely invite higher long-term
interest rates and encourage the yen to strengthen.

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WHAT ABOUT THE CABINET?
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4. (C) Media commentators already are criticizing Aso's
cabinet for lacking "star personalities" and for being a
"don't lose the election" cabinet (Ref). New LDP Secretary
General Hiroyuki Hosoda admitted as much September 26 saying
the LDP's target is "to win a majority and remain in power."
Moreover, PM's Aso's selection of Shoichi Nakagawa to be both

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Finance Minister and Minister for Financial Services probably
re-inforces Aso's inclination to shift toward fiscal
stimulus. As recently as August, Nakagawa laid out an
economic plan to a prominent monthly magazine that focused on
corporate and income tax cuts, infrastructure spending, and a
variety of subsidies to average consumers. In meetings with
Emboffs earlier in the year, Nakagawa took pains to argue it
was well-timed government spending in the early 2000s, rather
than structural reform, that finally allowed Japan to escape
from its "lost decade" of malaise that followed the bursting
of Japan's economic bubble in the early 1990s.


5. (C) The retention of Economic and Fiscal Policy Minister
Kaoru Yosano, though, may signal that Aso's focus on
short-term economic stimulus does not necessarily mean a
return to the LDP's free-spending ways of the 1980s. Japan's
public debt remains the highest in the OECD, and Yosano has
been a prominent voice for fiscal discipline. It is
noteworthy that, although PM Aso has stated he would like to
finance the proposed supplementary budget through reform of
the so-called "special accounts," current planning would
require an additional 395 billion yen worth of construction
bonds to finance the new expenditures. The plan would
increase public debt, but only modestly and without a more
eye-catching issuance of government bonds.

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COMMENT
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6. (C) Aso's focus on fiscal stimulus is a reflection of
election politics, for good and for bad. He is grappling
with lower-than-hoped-for initial polls, a slowing domestic
economy, fears about the global financial system, and an
embarrassing resignation of his Minister for Land,
Infrastructure, and Transport after only five days on the job
(Septel). Aso is playing the difficult hand he was dealt and
will continue to lock horns with the opposition Democratic
Party of Japan over his economic and other proposals.
SCHIEFFER